Economics 152 Solution to Sample Midterm 2

Transcription

1 Economics 152 Solution to Sample Midterm 2 N. Das PART 1 (84 POINTS): Answer the following 28 multiple choice questions on the scan sheet. Each question is worth 3 points. 1. If Congress passes legislation to make a substantial increase in government spending to counter the effects of a severe recession, this would be an example of a A) supply-side fiscal policy. B) contractionary fiscal policy. C) expansionary monetary policy. D) expansionary fiscal policy. 2. Which combination of policies would be the most expansionary? A) an increase in government spending and a decrease in taxes. B) a decrease in government spending and an increase in taxes. C) an increase in government spending and an increase in taxes. D) a decrease in government spending and a decrease in taxes. Use the following diagram to answer questions 3 6: 3. Refer to the above diagram. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at: A) AD0 B) AD1 C) AD2 D) AD3 4. Refer to the above diagram. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at: A) AD0 B) AD1 C) AD2 D) AD3 Page 1

2 5. Refer to the above diagram. If the economy's present aggregate demand curve is AD2: A) the most appropriate fiscal policy is an increase in government expenditures or a reduction of taxes. B) the most appropriate fiscal policy is a reduction in government expenditures or an increase of taxes. C) the most appropriate fiscal policy is a reduction in government expenditures or an increase in transfer payments. D) the most appropriate fiscal policy depends upon the level of output relative to the full-employment level of output. 6. Refer to the above diagram. Assume that the initial aggregate demand curve is AD1 and the government undertakes a fiscal policy which shifts the aggregate demand curve to AD2. If the horizontal distance between AD1 and AD2 is $100 billion, the change in real GDP in this situation: A) would be less than $100 billion. B) would be $100 billion. C) would be more than $100 billion. D) cannot be measured without knowing the size of the economy's multiplier. Use the following diagram to answer questions 7 and 8: 7. Refer to the above diagram. The full-strength multiplier is represented by a shift in aggregate demand from: A) AD2 to AD1 and a decline in real output from GDP2 to GDP1. B) AD2 to AD3 and an increase in real output from GDP2 to GDP'. C) AD1 to AD3 and an increase in real output from GDP1 to GDP'. D) AD3 to AD2 and a decrease in real output from GDP' to GDP2. 8. Refer to the above diagram. Over the GDP2 to GDP' range of real output, increases in aggregate demand produce price-level increases which: A) increase the size of the multiplier. C) reduce the size of the multiplier. B) represent cost-push inflation. D) result in a multiplier of zero. Page 2

3 9. The effect of an expansionary fiscal policy on the real GDP of an economy operating in the horizontal range of the aggregate supply curve is partially or fully A) reinforced by the crowding-out effect. B) offset by the crowding-out effect. C) reinforced by raising tax rates. D) offset by lowering tax rates. 10. Supply-side fiscal policy is generally enacted through A) a decrease in tax rates. B) a decrease in investment spending. C) an increase in government spending. D) an increase in automatic stabilizers. Use the following to answer questions 11 and 12: 11. Refer to the above diagrams. Suppose that government undertakes a fiscal policy action designed to increase aggregate demand from AD 1 to AD 2 and thereby to increase GDP from X to Z. In terms of graph a, which of the following might explain why GDP increases to Y rather than to Z? A) inflation. B) an increase in stock prices. C) a net export effect. D) a ratchet effect. 12. Refer to the above diagrams. A second correct answer to the previous question would be: A) a depreciation of the dollar. B) an increase in net exports. C) a decrease in the saving schedule. D) a crowding-out effect. 13. An expansionary U.S. fiscal policy which drives up U.S. interest rates is most likely to: A) decrease the foreign demand for dollars and appreciate the international value of the dollar. B) decrease the foreign demand for dollars and depreciate the international value of the dollar. C) increase the foreign demand for dollars and appreciate the international value of the dollar. D) increase the foreign demand for dollars and depreciate the international value of the dollar. Page 3

4 14. If you are estimating your total expenses for school next semester, you are using money primarily as: A) a medium of exchange. B) a store of value. C) a unit of account. D) a measure of asset demand. 15. The major component of the money supply (M1) is: A) money market mutual funds. B) checkable deposits. C) paper money in circulation. D) coins. 16. Which of the following is not part of the M2 money supply? A) money market mutual funds. C) currency. B) money market deposit accounts. D) large ($100,000 or more) time deposits. 17. Which of the following statements is correct? Other things equal: A) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right. B) a decline in the interest rate will shift the asset demand curve for money to the right, but leave the total money demand curve unchanged. C) deflation will shift both the transactions demand curve for money and the total money demand curve to the left. D) inflation will shift the transactions demand curve for money to the right, but leave the total money demand curve unchanged. 18. The basic policy-making body in the U.S. banking system is: A) the Open Market Committee. C) the Federal Advisory Council. B) the Board of Governors of the Federal Reserve. D) the Council of Economic Advisers. 19. To say that the Federal Reserve Banks are "quasi-public" banks means that: A) they are privately owned, but managed in the public interest. B) they deal only with banks of foreign nations and do not have direct business contact with American banks. C) they deal only with commercial banks, and not the public. D) they are publicly owned, but privately managed. 20. Suppose the demand for money and the supply of money increase simultaneously. We can: A) expect the interest rate to rise and bond prices to fall. B) expect the interest rate to fall and bond prices to rise. C) the nominal GDP to expand. D) not predict what will happen to interest rates or bond prices. 21. Other things equal, if there is an increase in nominal GDP: A) the demand for money will decrease. C) bond prices will rise. B) the interest rate will rise. D) consumption spending will fall. 22. Other things equal, if the supply of money is reduced: A) the demand for money will increase. C) bond prices will fall. B) the interest rates will fall. D) investment spending will increase. Page 4

5 23. If in the money market the quantity of money demanded exceeds the money supplied, the interest rate will: A) fall, causing household and businesses to hold less money. B) rise, causing households and businesses to hold less money. C) rise, causing households and businesses to hold more money. D) fall, causing households and businesses to hold more money. 24. An increase in the reserve ratio: A) increases the size of the spending income multiplier. B) increases the size of the money multiplier. C) decreases the size of the spending income multiplier. D) decreases the size of the money multiplier. 25. The basic reason why the commercial banking system can increase its demand deposits by a multiple of its excess reserves is that: A) the banking system must keep reserves equal to 100 percent of its demand-deposit liabilities. B) the MPC of borrowers is greater than zero, but less than 1. C) the central banks follow policies that prevent reserves from falling below a certain required level. D) reserves lost by any particular bank will be gained by some other bank. 26. When the money market is in equilibrium: A) the quantity of money demanded equals the quantity of money supplied. B) the interest rate is neither increasing nor decreasing. C) the bond market is in equilibrium. D) all of the above are true. 27. If actual reserves in the banking system are $40,000, excess reserves are $10,000 and demand deposits are $240,000, then the reserve ratio is: A) 10.5 percent. B) 11.5 percent. C) 12.5 percent. D) 13.5 percent. 28. If actual reserves in the banking system are $50,000, excess reserves are $5,000 and demand deposits are $225,000, then the money multiplier is: A) 10 B) 4 C) 5 D) 8 Page 5

7 PART 3 ( 10 POINTS): Answer the following 2 questions. Each question is worth 5 points. 1. Suppose the economy is in a recession and the government wants to conduct an expansionary fiscal policy. (Assume that the government has a budget deficit, so that to finance its expenditures, it needs to borrow from the money market). Critics of such a policy say that fiscal policy would not be effective because of crowding out. Answer the following two questions. Illustrate your answers by using graphs. (Please write legibly). (a) Explain what is crowding out. Crowding out is a phenomena associated with an expansionary fiscal policy (an increase in G) in the presence of a budget deficit. In order to finance its increased expenditures, the government would need to borrow money from the money market. This would raise interest rates and reduce interest sensitive investment and consumption, especially investment. This would cause the AD curve to shift to the right but not by the full extent that it would have. Thus, the effectiveness of an expansionary fiscal policy is reduced. To illustrate the above idea please use the three graphs that we went over in class i.e. use the graphs related to the money market, the investment market and the product/goods market. (b) What is your reaction to the critics skepticism about fiscal policy and crowding out? In order to defend fiscal policy and as a reaction to the critics skepticism about fiscal policy, one could argue that the Federal Reserve (Fed) could intervene in the money market and expand the money supply keeping interest rates constant and thereby not affecting investment. In this situation an expansionary fiscal policy (an increase in G) would have its desired effect on output and employment. This is called an monetizing the debt or an accomodating monetary policy. Again to illustrate this idea please use the three graphs that I have referred to in the answer above. Please note that fiscal and monetary policies are undertaken by different agents the former by Congress and the latter by the Fed. This is an example that although fiscal and monetary policies are different, the Congress and the Fed interact closely to stabilize the economy and promote economic growth. Page 7

Econ 20B- Additional Problem Set I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. 1.According to the theory of liquidity preference, the money supply

Chapter 15 FISCAL POLICY* The Federal Budget Topic: The Federal Budget 1) Which of the following is considered a purpose of the federal budget? I. To help the economy achieve full employment. II. To finance

Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Based on our understanding of the Keynesian cross, we know with certainty that an equal

Unit 4 Test Review KEY Savings, Investment and the Financial System 1. What is a financial intermediary? Explain how each of the following fulfills that role: Financial Intermediary: Transforms funds into

Chapter 10 1. The aggregate demand curve: A. is upward sloping because a higher price level is necessary to make production profitable as production costs rise. B. is downward sloping because production

Chapter 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* The Demand for Topic: Influences on Holding 1) The quantity of money that people choose to hold depends on which of the following? I. The price

Study Questions 5 (Money) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The functions of money are 1) A) medium of exchange, unit of account,

Econ 111 Summer 2007 Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The classical dichotomy allows us to explore economic growth

Practiced Questions Chapter 20 1. The model of aggregate demand and aggregate supply a. is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution

1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: a) If investment does not depend on the interest rate, the IS curve

Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Inflation can be started by 1) A) an increase in aggregate supply or a decrease in aggregate

Chapter 11 Money and Monetary Policy Macroeconomics In Context (Goodwin, et al.) Chapter Overview In this chapter, you will be introduced to a standard treatment of the banking system and monetary policy.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Of the four players in the money supply process, most observers agree that the most important player

Economics 101 Multiple Choice Questions for Final Examination Miller PLEASE DO NOT WRITE ON THIS EXAMINATION FORM. 1. Which of the following statements is correct? a. Real GDP is the total market value

Problem Set for hapter 20(Multiple choices) 1. According to the theory of liquidity preference, a. if the interest rate is below the equilibrium level, then the quantity of money people want to hold is

AP Macroeconomics: Vocabulary 1. Aggregate Spending (GDP): The sum of all spending from four sectors of the economy. GDP = C+I+G+Xn 2. Aggregate Income (AI) :The sum of all income earned by suppliers of

IS-LM Intersection In the short run, the economy moves to the intersection of the IS and LM curves (figure 1). Production adjusts to demand to put the economy on the IS curve. Bond prices and the interest

2.5 Monetary policy: Interest rates Learning Outcomes Describe the role of central banks as regulators of commercial banks and bankers to governments. Explain that central banks are usually made responsible

Worksheet 17.1: Intro to After watching Jason Welker s An Introduction to Aggregate Demand video found at https://www.youtube.com/watch?v=adgqvtlutmk, answer the following questions. 1. What factors cause

Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

Business Conditions Analysis Prof. Yamin Ahmad ECON 736 Sample Final Exam Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark the answers

Fill in the Blanks. Module 1 S.Y.B.COM. (SEM-III) ECONOMICS 1. The continuous flow of money and goods and services between firms and households is called the Circular Flow. 2. Saving constitute a leakage

Economics 202 Principles Of Macroeconomics Professor Yamin Ahmad The Federal Reserve System The Federal Reserve System, or the Fed, is the central bank of the United States. Supplemental Notes to Monetary

Practice Problems Mods 25, 28, 29 Multiple Choice Identify the choice that best completes the statement or answers the question. Scenario 25-1 First National Bank First National Bank has $80 million in

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

Chapter 30 Fiscal Policy, Deficits, and Debt QUESTIONS 1. What is the role of the Council of Economic Advisers (CEA) as it relates to fiscal policy? Use an Internet search to find the names and university

Name: Solutions Department of Economics Professor Dowell California State University, Sacramento Spring 2013 Problem Set #7 Due in hard copy at beginning of lecture on Monday, May 13, 2013 Important: Place

Advanced Placement Program AP Macroeconomics Practice Exam The questions contained in this AP Macroeconomics Practice Exam are written to the content specifications of AP Exams for this subject. Taking

Chapter 17 1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change

Lecture 6: Economic Fluctuations Rob Godby University of Wyoming Short-Run Economic Fluctuations Economic activity fluctuates from year to year. In some years, the production of goods and services rises.

WEB CHAPTER 2 Preview Monetary and Fiscal Policy in the ISLM Model S ince World War II, government policymakers have tried to promote high employment without causing inflation. If the economy experiences

Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Aggregate Supply Topic: Aggregate Supply/Aggregate Demand Model 1) The aggregate supply/aggregate demand model is used to help understand all of the following

KrugmanMacro_SM_Ch12.qxp 11/15/05 3:18 PM Page 141 Fiscal Policy 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant

2W EB CHAPTER Monetary and Fiscal Policy in the ISLM Model Preview Since World War II, government policymakers have tried to promote high employment without causing inflation. If the economy experiences

TOPIC 5: The IS-LM Model in an Open Economy Annaïg Morin CBS - Department of Economics August 2013 The IS-LM Model in an Open Economy Road map: Two concepts to better understand openness The goods market

PRACTICE- Unit 6 AP Economics Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The term liquid asset means: A. that the asset is used in a barter exchange.

Open Economy Macroeconomics: The IS-LM-BP Model When we open the economy to international transactions we have to take into account the effects of trade in goods and services (i.e. items in the current

Government Budget and Fiscal Policy 11 CHAPTER The National Budget The national budget is the annual statement of the government s expenditures and tax revenues. Fiscal policy is the use of the federal

Aggregate Supply and Aggregate Demand Chapter CHAPTER CHECKLIST Define and explain the influences on aggregate supply. Aggregate supply is the output from all firms. Other things remaining the same, the

Macroeconomics SYLLABUS Jason Farone Blackhawk High School Beaver Falls, PA School Profile School Location and Environment: Blackhawk High School is a public school in Beaver Falls, PA, located 50 miles

Extra Review Questions and Answers for Chapter 10 B. Answers to Short -Answer, Essays, and Problems 1. Whenever there is a shift in the investment schedule and/or the consumption-saving schedules, there

Econ 201 Final Winter 2008 SOLUTIONS 1 Multiple Choice - 50 Points (In this section each question is worth 1 point) 1. Suppose a waiter deposits his cash tips into his savings account. As a result of only

ECON 4110: Money, Banking and the Macroeconomy Midterm Exam 2 Name: SID: MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following

Lecture 11-1 6.1 The open economy, the multiplier, and the IS curve Assume that the economy is either closed (no foreign trade) or open. Assume that the exchange rates are either fixed or flexible. Assume

ADAS Practice A country s economy is in a short-run equilibrium with an output level less than the full-employment output level. Assume an upwardsloping aggregate supply curve. (a) Using a correctly labeled

Chapter 8 THE ECONOMY AT FULL EMPLOYMENT: THE CLASSICAL MODEL* The Classical Model: A Preview Topic: Real Variables 1) Real variables A) are those that determine the cost of living. B) are those that determine

University of Colorado at Boulder Department of Economics ECON 4423: INTERNATIONAL FINANCE Final Examination Fall 2005 Name: Answer Key Student ID: Instructions: This test is 1 1/2 hours in length. You

Exchange rates are a confusing concept despite the fact that we have to deal with exchange rates whenever we travel abroad. The handout will tackle the common misconceptions with exchange rates and simplify

Global Macroeconomics ::Solutions:: Practice Exam 3 Fall 2015 Do not open this exam until instructed to do so. You have 75 minutes to complete this exam You may use a calculator; you may not use any other

1. An open economy is one in which: A) the level of output is fixed. B) government spending exceeds revenues. C) the national interest rate equals the world interest rate. D) there is trade in goods and